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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[x] Quarterly report pursuant to section 13 of 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2000
[ ] Transition report pursuant to section 13 of 15(d) of the Securities
Exchange Act of 1934 for the transition period from________ to_________
Commission File No. 0-21038
NETWORK SIX, INC.
(Exact name of registrant as specified in its charter)
Rhode Island 05-0366090
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
475 Kilvert Street, Warwick, Rhode Island 02886
(Address of principal executive offices, including zip code)
(401) 732-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
---- -----
As of March 31, 2000 there were 796,184 shares of the registrant's Common Stock,
$.10 par value, outstanding.
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1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK SIX, INC.
CONDENSED BALANCE SHEETS
Mar. 31, 2000 Dec. 31, 1999
ASSETS (unaudited)
Current assets: ---------------- --------------
Cash $2,549,072 $2,453,935
Contract receivables, less allowance for
doubtful accounts of $49,000 at March 31,
2000 and December 31, 1999 1,100,813 1,561,255
Costs and estimated earnings in excess of
billings on contracts 1,189,628 759,891
Refundable taxes on income 154,720 150,640
Deferred taxes 147,833 287,083
Other current assets 147,900 151,933
---------------- --------------
Total current assets 5,289,966 5,364,737
Property and equipment:
Computers and equipment 620,802 590,124
Furniture and fixtures 162,606 162,606
Leasehold improvements 20,191 20,191
---------------- --------------
803,599 772,921
Less: accum. depreciation and amortization 600,460 578,015
---------------- --------------
Net property and equipment 203,139 194,906
Deferred taxes 513,795 513,795
Other assets 64,933 86,750
---------------- --------------
$6,071,833 $6,160,188
================ ==============
2
Mar. 31, 2000 Dec. 31, 1999
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY ---------------- ---------------
Current liabilities:
Current installment of obligations
under capital leases $0 $8,132
Current portion of long-term debt:
Vendors 100,000 100,000
Others 350,317 349,141
Accounts payable 110,722 202,195
Accrued salaries and benefits 342,739 508,193
Accrued subcontractor expense 59,833 12,843
Other accrued expenses 79,775 86,938
Billings in excess of costs and
estimated earnings on contracts 93,407 124,458
Preferred stock dividends payable 1,203,612 1,119,468
---------------- ---------------
Total current liabilities 2,340,405 2,511,368
Long-term debt, less current portion:
Vendors 542,239 542,239
Others 750,107 775,636
---------------- ---------------
Total Liabilities 3,632,751 3,829,243
Stockholders' equity:
Series A convertible preferred stock,
$3.50 par value. Authorized 857,142.85
shares; issued and outstanding 714,285.71
shares at March 31, 2000 and December 31,
1999; liquidation of $3.50 per share
plus unpaid and accumulated dividends 2,235,674 2,235,674
Common stock, $.10 par value. Authorized
4,000,000 shares; issued 796,184 shares
at March 31, 2000 and 794,306 at
December 31, 1999 79,618 79,430
Additional paid-in capital 1,894,615 1,888,652
Treasury stock recorded at cost, 11,163 shares
at March 31, 2000 and 8,081 shares at
December 31, 1999 (42,434) (28,179)
Retained earnings (accumulated deficit) (1,728,391) (1,844,632)
---------------- ---------------
Total stockholders' equity 2,439,082 2,330,945
---------------- ---------------
Total Liabilities & Stockholders' Equity $ 6,071,833 $ 6,160,188
================ ===============
3
NETWORK SIX, INC.
Condensed Statements of Income
(Unaudited)
Three months Three months
ended 3/31/00 ended 3/31/99
--------------- ---------------
Contract revenue earned $2,856,038 $2,688,400
Cost of revenue earned 1,783,529 1,574,522
--------------- ---------------
Gross profit 1,072,509 1,113,878
Selling, general & administrative expenses 730,822 661,920
--------------- ---------------
Income from operations 341,687 451,958
Other deductions (income)
Interest expense 37,386 29,956
Interest earned (35,334) (13,927)
--------------- ---------------
Income before income taxes 339,635 435,929
Income taxes 139,251 178,731
--------------- ---------------
Net income $200,384 $257,198
=============== ===============
Net income per share:
Basic 0.15 0.23
=============== ===============
Diluted 0.15 0.23
=============== ===============
Shares used in computing net income per share:
Basic 795,725 774,975
=============== ===============
Diluted 795,725 774,975
=============== ===============
Preferred dividends declared $84,144 $78,596
=============== ===============
4
NETWORK SIX, INC.
Condensed Statements of Cash Flow
(Unaudited)
Three months Three months
ended ended
3/31/00 3/31/99
-------------- --------------
Net Income $ 200,384 $ 257,198
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 22,445 16,032
Loss on sale/disposal of fixed assets - 8
Changes in operating assets and liabilities:
Contract receivables 460,442 535,639
Cost and estimated earnings
in excess of billings on contracts (429,737) (150,752)
Refundable taxes on income (4,080)
Other current assets 4,033 (17,932)
Deferred taxes 139,250
Other assets 21,817 13,357
Accounts payable (91,473) 62,985
Accrued salaries and benefits (165,454) (156,785)
Accrued subcontractor exp. 46,990 2,430
Other accrued expenses (7,163) (24,746)
Billings in excess of costs
and estimated earnings on contracts (31,051) 16,299
Income taxes payable - (654,055)
Net cash provided by (used in) operating activities 166,403 (100,322)
Cash flows from investing activities:
Cash Proceeds from Sale/Disposal of Capital Assets - 350
Capital expenditures (30,677) (33,160)
Net cash used in investing activities (30,677) (32,810)
-------------- --------------
5
Three months Three months
ended ended
3/31/00 3/31/99
-------------- --------------
Cash flows from financing activities:
Principal payments on capital lease obligations (8,132) (14,033)
Payments on long term debt (24,353) (22,630)
Net payments on note payable to bank - -
Proceeds from issuance of common stock 6,151 58,964
Purchases of treasury stock (14,255)
-------------- --------------
Net cash provided by (used in) financing activities (40,589) 22,301
-------------- --------------
Net increase (decrease) in cash 95,137 (110,831)
Cash at beginning of period 2,453,935 1,442,035
-------------- --------------
Cash at end of period $2,549,072 $1,331,204
============== ==============
Supplemental cash flow information:
Cash paid during the period for:
Income taxes $ - $832,786
Interest 21,073 22,849
============== ==============
6
NETWORK SIX, INC.
Notes to Financial Statements
March 31, 2000
(unaudited)
(1) Basis of Presentation
The interim financial statements have been prepared without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to SEC rules
and regulations; nevertheless, management believes that the disclosures
herein are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Form 10K and Proxy Statement.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position
of the Company as of March 31, 2000, and the statements of income and cash
flows for the three month periods ended March 31, 2000 and 1999, have been
included herein. The results of operations for the interim periods are not
necessarily indicative of the results for the full years.
(2) Under the requirements in Statement of Financial Accounting Standards
(SFAS) No. 128 for calculating basic earnings per share, the dilutive
effect of stock options and warrants are excluded.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements reflecting the Company's
expectations or beliefs concerning future events that could materially affect
Company performance in the future. All forward-looking statements are subject
to the risks and uncertainties inherent with predictions and forecasts. They
are necessarily speculative statements, and unforeseen factors, such as
competitive pressures, litigation results and regulatory and state funding
changes could cause results to differ materially from any that may be expected.
Actual results and events may therefore differ significantly from those
discussed in forward-looking statements. Moreover, forward-looking statements
are made in the context of information available as of the date stated, and the
Company undertakes no obligation to update or revise such statements to reflect
new circumstances or unanticipated events as they occur.
GENERAL
In March 2000, the Company announced that three non-employee Directors of
the Board resigned. The three, Ralph A. Cote, Nicholas R. Supron and Peter C.
Wallace, all cited personal reasons as well as philosophical differences with
the Company's Chairman, President and CEO, Kenneth C. Kirsch. None of them
expressed any objection to any action of the Company or the Board.
In March 2000, the Company announced that Donna J. Guido, Vice President of
Information Systems for the Company, and Henry N. Huta, President/CEO of BIW
Tamaqua Cable, were elected to the Board of Directors.
7
In March 2000, the Company announced new management and technical hires.
In March 2000, the Company announced that Edward J. Braks, Chief Financial
Officer and Chair of the Management Committee of Paul Arpin Van Lines, Inc. was
elected to the Board. The Company also announced that Owen S. Crihfield and
Thomas J. Berardino, both Managing Directors of Saugatuck Capital Company, have
joined the Board of Directors.
YEAR 2000 DISCLOSURE
The "Year 2000 Issue" is the result of the use of two digits instead of
four to define the applicable year. The Company has completed its Year 2000
program by testing and upgrading (when necessary) all software and hardware. At
the time of filing of this 10-Q, the Company has not experienced, or anticipates
experiencing, any significant problems internally or externally to its
operations. Although the Company believes it has completed this upgrade program
successfully, there can be no assurance that this program will continue to be
successful in remediating the impact of the "Year 2000 Issue".
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO 1999
Contract revenue increased $167,638 or 6% from $2,688,400 in the three
months ended March 31, 1999 to $2,856,038 in the three months ended March 31,
2000, primarily due to the addition of the State of Rhode Island, Department of
Children, Youth and Families maintenance and support contract known as RICHIST.
Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, increased $209,007 or 13% from
$1,574,522 in the three months ended March 31, 1999 to $1,783,529 in the three
months ended March 31, 2000 due to increased contract revenues and startup costs
associated with the RICHIST contract.
Gross profit decreased $41,369 or 4%, from $1,113,878 for the three months
ended March 31, 1999 to $1,072,509 for the three months ended March 31, 2000.
Gross profit as a percentage of revenue earned decreased from 41% for the three
months ended March 31, 1999 to 38% for the three months ended March 31, 2000.
The decrease in gross profit percentage is due to startup costs related to the
RICHIST contract.
Selling, general and administrative ("SG&A") expenses increased $68,902, or
10%, from $661,920 in the three months ended March 31, 1999 to $730,822 in the
three months ended March 31, 2000, due to an increase in marketing and business
development staff and related activities. On a percentage of revenues basis,
SG&A expenses increased from 25% to 26%.
Interest expense increased $7,430 to $37,386, or 25%, from $29,956 due to
imputed interest on the settlement obligation with the State of Hawaii. See
Item 1 - Legal Proceedings.
As a result, income before income taxes decreased $96,294 from $435,929 for
the three months ended March 31, 1999 to $339,635 for the three months ended
March 31, 2000.
Net income decreased $56,814 from $257,198 for the three months ended March
31, 1999 to $200,384 for the three months ended March 31, 2000.
8
LIQUIDITY AND CAPITAL RESOURCES
In order to finance bid preparation costs and to obtain sufficient
collateral to support performance bonds required by some customers, the Company
has, in the past, entered into joint ventures with other firms with greater
financial resources when bidding for contracts. The Company expects to continue
and expand this practice prospectively as well as to pursue more time and
material contracts than it has historically pursued. Time and materials
contracts generally do not require performance bonds and almost always involve
less risk to meet customer requirements.
The Company has historically not received its first contract progress
payments until approximately three to six months after contract award, which
itself was as much as 12 months after proposal preparation commences. The
Company was therefore required to fund substantial costs well before the receipt
of related income, including marketing and proposal costs and the cost of a
performance bond. Prospectively, the Company expects to tighten up this
timetable, thereby reducing the requirement for additional working capital.
The Company has funded its operations through cash flows from operations,
bank borrowings, borrowings from venture partners, and private placements of
equity securities. Net cash provided by operating activities was $166,403 and
($100,322) for the three months ended March 31, 2000 and 1999 respectively.
Fluctuations in net cash provided by operating activities are primarily the
result of changes in net income, accounts receivable, accounts payable, costs
and estimated earnings in excess of billings on contracts due to differences in
contract milestones and payment dates, as well as income tax payments.
On September 21, 1998 the Company entered into two five-year term loans,
each for $250,000. One lender was the Small Business Loan Fund Corporation,
("SBLFC"), a subsidiary of the Rhode Island Economic Development Corporation.
The other lender was the Business Development Corporation of Rhode Island
("BDC"). The SBLFC loan carries an annual interest rate of 9.5% and must be
repaid over five years. The BDC loan carries an annual interest rate of 10.25%,
and an annual deferred fee of $5,000, and must be paid back over five years.
Both term loans are secured by substantially all the assets of the Company. The
BDC was also issued five-year warrants to purchase 11,500 unregistered shares of
the Company's Common Stock at a price of $4.50 per share. The warrants expire
on September 20, 2003. The fair value of the warrants was estimated by the
Company to be $36,806 using the Black-Scholes model and is being amortized
ratably over the exercise period. Such amount is included in other noncurrent
assets on the accompanying balance sheet.
On November 15, 1999, the Company entered into a revolving line of credit
with a commercial bank. This $1 million revolving line of credit is secured by
all of the assets of the Company and the security interest of the commercial
bank is superior to that of SBLFC and BDC. The Company can borrow up to 80% of
certain qualified accounts receivable at an interest rate of prime plus 1/4%.
On March 31, 2000, the revolving line of credit had an outstanding balance of
zero.
The Company believes that cash flow generated by operations will be
sufficient to fund continuing operations through the end of 2000. The Company
believes that inflation has not had a material impact on its results of
operations to date.
9
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
There are no recently issued financial accounting standards that impact the
Company's financial statements.
PART 11 - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1995, the Company began negotiating a significant amendment to its
contract for a child support enforcement ("CSE") system with the State of Hawaii
("the State") when it determined that the total estimated cost to complete the
system would be significantly greater than expected. In March 1996, the Company
received final State and federal government approval for this contract amendment
totaling $4.4 million. As a result of numerous in-depth reviews of this
contract amendment, management determined that remaining contract costs would
exceed the contract value by $440,000, and therefore, accrued this loss in
December 1995.
In June 1996, the Company announced a new subcontract agreement with
Complete Business Solutions, Inc. ("CBSI") to expand CBSI's role in the Hawaii
CSE contract. CBSI, at the request of Hawaii, was contracted to lead a detailed
review of the current system under development. Hawaii, in turn, agreed to pay
CBSI $1.2 million from the Company's remaining contract budget when various
milestones were achieved. The Company had a significant role in the detailed
review and had hoped that its results would facilitate the resolution of open
contractual scope issues.
On September 13, 1996, the State of Hawaii terminated its contract with the
Company, effective September 23, 1996, claiming that the Company had failed to
fulfill its obligations under the contract. In response, the Company also
terminated the contract with the State effective September 23, 1996. The Hawaii
contract, originally estimated to be a $20.7 million contract, was increased to
$25.2 million by the State in February 1996, and was the Company's largest
contract at the time. Prior to termination, approximately $16.5 million of
costs had been incurred towards completion of the contract, and $11 million had
been billed and substantially paid.
On November 12, 1996, the State of Hawaii filed a lawsuit in the Circuit
Court of the First Circuit of the State of Hawaii (the "Court") against the
Company and Aetna Casualty and Surety and Federal Insurance Company for damages
due to breach of contract (the "Hawaii litigation"). Aetna Casualty and Surety
and Federal Insurance Company provided the $10.3 million performance bond on the
Company's contract with the State of Hawaii to develop and install the State's
child support enforcement system. The suit alleged that the Company failed to
meet contractual deadlines, provided late, incomplete and/or unsuitable
deliverables, materially breached the contract by never completing the design,
the application programming, and the system test and systems implementation.
The State sought an unspecified amount for general damages, consequential and
special damages, liquidated damages, attorneys' fees, reimbursement for the cost
of the suit and interest costs that the court might deem just and proper.
10
The Company denied the State's allegation and, on January 23, 1997, filed a
counter claim against the State alleging that the State has breached the
contract. The Company sought $70 million in damages and alleged that the State
fraudulently induced the Company into designing and building a system having
capabilities and features far beyond the scope of the Company's contract. The
fraudulent inducement was in the form of withholding payments, improper
rejection of work that satisfied the requirements of the contract and verbal and
written abuse of the Company's employees and management.
In addition, Unisys, a vendor providing equipment under the Company's
Hawaii contract, submitted a $896,000 claim against the $10.3 million
performance bond. In February of 1997, the State released all but $1.1 million
of the performance bond; the remainder is intended to cover amounts payable to
Unisys and other subcontractors. In April of 1997, after a detailed review of
their records and discussions with the Company, Unisys agreed to lower their
claim to $859,602 and Aetna Casualty and Surety paid that claim. Lockheed
Martin IMS ("Lockheed"), who guaranteed the performance bond, reimbursed Aetna
for that claim. In December 1997, the Company reached an agreement with
Lockheed to repay the $859,602 over a five-year period.
On December 13, 1996, CBSI filed a lawsuit in the Superior Court of the
State of Rhode Island for $517,503, which the Company had previously accrued,
plus interest costs and attorney's fees. The Company disputed the $517,503 owed
to CBSI and filed a counterclaim against CBSI on January 13, 1997, alleging,
among other things, that CBSI failed to complete its duties required under the
subcontract with the Company in a timely manner, improperly engaged in
negotiations with the State of Hawaii to complete the project, hired and
attempted to hire employees of the Company in violation of its subcontract
agreement with the Company and obtained and utilized confidential information
and proprietary intellectual property inappropriately. Also, the Company
alleged that CBSI owed the Company $482,750 as of December 31, 1996, for which
the Company did not establish a reserve for uncollectibility.
On February 3, 1997, the Company filed a third-party complaint ("TPC") as
part of the Hawaii litigation against MAXIMUS Corporation ("MAXIMUS") and CBSI.
MAXIMUS had been the State of Hawaii's contract supervisor and advisor since the
inception of the Hawaii project. The allegations the Company made against CBSI
in this TPC were substantially similar to the allegations made against CBSI in
the Company's counterclaim to CBSI's December 13, 1996, lawsuit brought against
the Company in Rhode Island. The Company alleged that MAXIMUS was liable to the
Company on grounds that: (i) the Company was an intended third party beneficiary
under the contract between MAXIMUS and Hawaii; (ii) MAXIMUS tortuously
interfered in the contract between the Company and Hawaii; (iii) MAXIMUS
negligently breached duties to the Company, and (iv) MAXIMUS aided and abetted
Hawaii in Hawaii's breach of contract. The Company's complaint sought $70
million in damages.
Due to the significant uncertainty created by these events, the Company
ceased recognition of revenue on the Hawaii contract in 1996. An adjustment of
$1.8 million was recorded in the fourth quarter of 1996 to reverse revenue of $1
million, $400 thousand and $400 thousand recorded previously in the first,
second and third quarters, respectively. In addition, the Company expensed
$1.96 million of costs incurred related to the Hawaii contract in 1996.
On May 11, 1999 the Company reached a settlement agreement with both the
State and CBSI, which was approved by the court on July 22, 1999. All claims of
the Company, the State and CBSI were dismissed, except the Company's claims
against MAXIMUS. Per the settlement, the Company agreed to pay the State $1
million over four years as follows: June 1999 - $250,000, June 2000 - $250,000,
June 2001 - $250,000, June 2002 - $125,000 and June 2003 - $125,000. The first
payment was reduced by a $50,000 credit for the settlement of a lease obligation
on computer equipment. The equipment lessor, who had filed suit against the
Company, accepted $50,000 from the Company in full payment of that obligation.
CBSI agreed to pay the Company $300,000 immediately, which the Company has
received. Neither party to these agreements admitted any wrongdoing. To
facilitate the settlement, Lockheed agreed to modify certain aspects of a
promissory note issued to it by the Company in 1997. Lockheed agreed to extend
the note's maturity several years, to reschedule favorably certain principal
payments and to reduce the interest rate on the remaining principal, which is
$642,000 as of March 31, 2000.
11
On October 29, 1999 the Company and MAXIMUS entered into a settlement
agreement whereby the Company released MAXIMUS from all claims and potential
claims in relation to the Hawaii contract and vice versa in exchange for a
payment to the Company of $50,000, which the Company received in November 1999.
As of March 31, 2000, the Company was not involved in any litigation.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
None
ITEM 6. EXHIBITS AND REPORTS
(a) None
(b) The following reports on Form 8-K have been filed during the quarter
for which this report is filed.
A current report on Form 8-K, dated February 28, 2000 was filed by the
Company and included the press release dated February 28, 2000 announcing
the Company's results for the year ended December 31, 1999. A Statement of
Operations (without notes) for the years ended December 31, 1999, 1998 and
1997 and a Balance Sheet as of December 31, 1999 and 1998 was also included
with the filing.
A current report on Form 8-K, dated March 15, 2000 was filed by the Company
and included the press release dated March 15, 2000 announcing that three
non-employee Directors of the Board resigned. The three, Ralph A. Cote,
Nicholas R. Supron and Peter C. Wallace, all cited personal reasons as well
as philosophical differences with the Company's Chairman, President and
CEO, Kenneth C. Kirsch. None of them expressed any objection to any action
of the Company or the Board. The Company also announced that Donna J.
Guido, Vice President of Information Systems for the Company, and Henry N.
Huta, President/CEO of BIW Tamaqua Cable, were elected to the Board of
Directors.
A current report on Form 8-K, dated March 21, 2000, was filed by the
Company and included the press release dated March 21, 2000 announcing new
management and technical hires.
A current report on Form 8-K, dated March 30, 2000, was filed by the
Company and included the press release dated March 30, 2000 announcing the
election of Edward J. Braks to the Board of Directors on March 23, 2000.
The Company also announced Owen S. Crihfield and Thomas J. Berardino joined
the Board of Directors effective March 30, 2000.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Network Six, Inc.
Date: April 28, 2000 By: /s/ Kenneth C. Kirsch
---------------------------------------------
Kenneth C. Kirsch
Chairman, President and
Chief Executive Officer
By: /s/ James J. Ferry
---------------------------------------------
James J. Ferry
Vice President of Finance and Administration,
Chief Financial Officer and Treasurer
(principal financial officer)
13